Betting on these 2 stocks in the auto space: Girish Pai

Edited excerpts:Do you think the market correction has come and gone and is it time to put money to work or “do you think that we are not yet done with the lows for 2018?I do not think we are done with the lows of 2018. What you have seen is a 10% correction — a garden variety correction in a normal bull market. 2017 was an unusual year where we saw very little volatility but if you look back in the previous bull markets of 2000-2007, every single year you had a 15-20% correction and these were like two or three in number and I recall a particular correction in 2005 when the index was down as much as 30%. In a normal bull market, 15-20% correction twice or thrice a year is par for the course. We have not seen that in 2017 and a 10% correction in my view is not something one should get too worried about.

The macro setup is still fairly negative — be it from the global side or it from the domestic side. On the global side, we will still worry about bond yields moving up in US and elsewhere. There is a normalisation of monetary policy and there is a paring of Fed balance sheet and also there could be a QE slowing down of QE or QE withdrawal happening by ECB and Bank of Japan considering the robust economic outlook, growth outlook for these two regions of the world. All that is on the global macro side.

On the domestic side, macros have been worsening. Growth is good but fiscal deficit, current account deficit, interest rate, inflation, are all trending negatively. The earnings picture is probably the one bright spot as things stand right now but even there, there are certain wrinkles because corporate banks will probably have to take a sizable write off in Q4, which I do not think is accounted for by the street analysts. One does not know what these numbers are going to look like. Probably one will know once the earnings season is through and we will see some bit of that even in the first quarter of FY19.

While the earnings picture is looking up, especially for FY19, I would still think that the 20-25% kind of earnings growth that the street is anticipating will have to be pared back because corporate banks will show a little slower growth than what the street is anticipating at this point in time.

Do you think that IT stocks are still worth a buy irrespective of the move that has already played out in the likes of TIC, Infosys and for that matter the entire mid-cap IT pack?The outperformance of the Nifty IT vis-à-vis Nifty in the last three to four months has been more technical than fundamental. I say technical because the institutional investor base had been seriously under-weight. The IT sector has underperformed the expectations for the last three years in terms of growth. So, there has been a fairly under-weight position that the sector has had vis-à-vis institutional investors and there has been a slight uptick in terms of growth expectations for FY19 versus what the street had previously.

The other thing that one needs to see is that the big over-weight position of financials there has been a little bit of a paring back of expectations in terms of what growth is going to look like be it for FY18 or FY19 considering the higher interest rate regime that we are seeing in India. Also, the stressed asset situation probably worsening because in some of the new regulations that have been probably been brought in by RBI.

This is the kind of situation which could potentially last for another three to six months and you could see Nifty IT outperforming Nifty but if you take a three-year view, I do not think on a fundamental basis, the IT services sector — the tier-1 stocks are going to deliver more than high single digit earnings growth.

From a structural standpoint, I would still think that IT services sector is an avoid, I would want to bet on, on a structural basis those sectors which can deliver you earnings growth upwards of the normal GDP growth. I think a sector which can deliver a 15% or companies which can deliver more than 15% CAGR over three to five-year timeframe is what I would look to invest in. So, from that standpoint, I would say IT sector very short term may be it may outperform but from a longer term perspective I would think it is a sector that one needs to avoid.

How do you see the Eicher, Page Industries and Titans of the world moving? These are good businesses and stocks like Eicher, Maruti have corrected very quickly in the last two months?Among those three stocks that you just mentioned, we like Eicher. We could potentially see high teen kind of volume growth for this company over the next two to three-year timeframe. With the expansion in distribution that one would see, the demand in the top 25 cities is still very strong for the company because we have about a 70-80 million odd bike base with owners who would want to kind of upgrade to premium bikes at some point in time or the other.

With increasing income, that is a fairly distinct possibility. So, we think that is a stock to look at. In the consumption side in the auto space. Eicher is one stock we like. The other is Hero MotoCorp where we think that the replacement cycle, premiumisation, scooterisation, these are triggers which could drive a 10-11% kind of volume growth for this company over the next couple of years. I would say Eicher and Hero MotoCorp within the auto space in the two-wheeler side is what we like at this point.